Open Your Eyes to Google's Structural Crisis

| About: Alphabet Inc. (GOOG)

Microsoft's (NASDAQ:MSFT) recent attack on Google's (NASDAQ:GOOG) "cavalier" approach to copyright protection highlights deep structural problems at the core of Google's business model.

Simply interpreted, this whole story regarding copyright issues is similar to opening a sweatshop with cheap illegal copycats from Asia next to a Nike Shop. "It will be a very good advertisement of your business" is a very weak argument against a criminal case. It is plainly illegal and will kill the Nike Shop.

"Companies [like Google] that create no content of their own, and make money solely on the backs of other people's content, are raking in billions through advertising revenue and IPOs," says Rubin, who oversees copyright and trade secret laws at Microsoft.

Microsoft is correct and is actually raising an issue which could save trillions of dollars to the struggling US economy. What's more, as long as this "too liberal", criminal in nature approach is allowed (I think nobody cares or understands the far reaching complications), it is killing our economy and eroding our last resource of defense - Intellectual Property Rights.

You may be unaware that since the 70s, the US has been the driving force behind constructing an "IP" infrastructure and Patent and Copyright Protection. It was clear then that the industrial wars would be lost to countries with cheap labor and loose environmental policies. The only place for the developed world to be was on the high end of value chain products, which depends upon technological advances and "IP" protection. Whole industries blossomed on this concept and Google is assaulting one of the last pillars of the US economy. Take out Hollywood, Music, MSFT, Oracle (NASDAQ:ORCL) and Cisco (NASDAQ:CSCO), and there will be nothing to export from this country! The US dollar will cease to exist. Will we have congressional hearings about it? I am not sure, but what we all know now what happened to steel makers and manufacturing. Google's business model -which is built around "open space" WEB and with "open sources", available to other technologies delivering similar customer satisfaction - is in structural crisis.

In plain English, this is not unique. Search is a commodity, as Buffet would put it (in a bad sense of this world) and the competitor is just a click away or even in the same application, like with Vista. Google was able to build a franchise because, for a while, its technology was better (or perceived to be better) by its customers.

But now Google is feeling the hit: for its business it needs clicks on ads; for this it needs traffic, which has begun to fall, diverted to new interesting places with more content, in which customers can easily satisfy their search needs without getting out to Google. Contrary to Yahoo! (NASDAQ:YHOO), which is Media Company and creating its own content, Google's buying YouTube for 1.6 billion was a desperate attempt to capitalise its franchise further, based on borrowing others' content for nothing; they knew it indicated a lot of Capex and that the monetizing model was not in place, but they could not imagine that the copyright issue would put YouTube on the spot immediately.

With the economy falling into recession (I do not buy the spin about the "blip" in the Bull Market; this reaction is the last chance to get out of tech) advertising will be cut first. Now Google will feel the pressure on all fronts: growth of revenue is falling and will fall further due to competition from Yahoo! and others; Capex and costs are rising; payment for content on YouTube will add to the cost structure; monetizing is still not clear and everybody who is depending on IP rights will be waging war against it; margins will be squeezed further and free cash flow will fall below 2006 level, opening a Pandora's box of unsustainable valuation with slowing growth; earnings without tax manipulation will be lower in Q1 2007 and will be followed by a crash in stock price.

Investors will finally open their eyes to reality, with the help of the SEC, but it could be too late, once again. UBS' upgrade of Google yesterday happened exactly at the low channel support line of Google's down trend; it is no more than a act of mercy to those who did not sell yet. All these "strange" coincidences, including the perfect match of maximum pain on options expiration days, will have its time in court one day.

Regarding UBS, they happen to have had lending value for Tenke Mining from 0.9 CAD up to 5.0 CAD and then "suddenly" found that it is too risky: many people lost their Tenke mining shares in margin calls and somebody else got them for cheap. Should I remind you that TNK.TO was above 16.0 CAD after hours yesterday? UBS had a strong BUY on ENRON and Worldcom as well.

Welcome to 2001 again. Step out of the woods and look around; maybe you are missing something. It could be your money.

Disclosure: Author has a short position in GOOG.